Tax Deductions Explained
Tax deductions are expenses that you can use to reduce the amount of income you have to pay taxes on. The amount you can deduct and how to report it depends on the type of deduction you claim.
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Types
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The IRS categorizes tax deductions as either adjustments to income or itemized deductions. Adjustments to income do not require you to forgo the standardized deduction.
Function
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The IRS allows you to subtract the value of your deductions from your taxable income before your tax is calculated. For example, if you had $40,000 of taxable income and $4,000 in deductions, your taxes would be calculated based on $36,000 of income.
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Record Keeping
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To claim deductions, you must keep accurate documentation of your expenses in case the IRS audits your return.
Filing Requirements
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If you claim certain adjustments to income, such as the IRA deduction, the student loan interest deduction, the educator expenses deduction, and the tuition and fees deduction, you cannot use form 1040EZ to file your taxes. If you claim any itemized deductions, you must file your taxes using from 1040 and attach Schedule A.
Misconceptions
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The value of a tax deduction varies based on what tax bracket you fall into. For example, if you are in the 25 percent tax bracket, a $1,000 deduction would save you $250, but if you were in the 35 percent tax bracket, that same deduction would save you $350 on your taxes.
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